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Does Formality Improve Micro-Firm Performance? Quasi-Experimental Evidence from the Brazilian SIMPLES Program

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Author Info
Fajnzylber, Pablo () (World Bank)
Maloney, William F. () (World Bank)
Montes-Rojas, Gabriel V. () (City University London)

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Abstract

This paper employs regression discontinuity methods to identify the effect of formality on Brazilian micro-firm performance. The SIMPLES program introduced in November 1996 consolidated multiple taxes and social security contributions into a single payment and reduced taxes for eligible small firms. This provides a quasi-natural experiment that allows us to eliminate many of the endogeneity issues surrounding the impact of formality, measured across several dimensions, on firm performance. We find that SIMPLES had a significant effect on the proportion of firms that have a license to operate, are registered as a legal entity, pay taxes and make social security contributions. Moreover, newly created firms that opt for operating formally achieve higher levels of revenue and profits, employ more workers and are more capital intensive (only for those firms that have employees). The channel through which this occurs is not access to credit or contracts with larger firms. Rather, it appears that the lower cost of contracting labor leads to adopting production techniques that involve greater permanence and a larger paid labor force.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4531.

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Length: 37 pages
Date of creation: Oct 2009
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Handle: RePEc:iza:izadps:dp4531

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Related research
Keywords: micro-firms; self-employment; informality;

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Find related papers by JEL classification:
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Aureo de Paula & Jose A Sheinkman, 2007. "The Informal Sector," Levine's Bibliography 122247000000001663, UCLA Department of Economics. [Downloadable!]
  2. Áureo de Paula & José A. Scheinkman, 2007. "The Informal Sector," NBER Working Papers 13486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Pablo Fajnzylber & William Maloney & Gabriel Montes-Rojas, 2009. "Releasing Constraints to Growth or Pushing on a String? Policies and Performance of Mexican Micro-Firms," The Journal of Development Studies, Taylor and Francis Journals, vol. 45(7), pages 1027-1047. [Downloadable!] (restricted)
  4. Imbens, Guido W & Angrist, Joshua D, 1994. "Identification and Estimation of Local Average Treatment Effects," Econometrica, Econometric Society, vol. 62(2), pages 467-75, March. [Downloadable!] (restricted)
    Other versions:
  5. Almeida, Rita & Carneiro, Pedro, 2005. "Enforcement of labor regulation, informal labor, and firm performance," Policy Research Working Paper Series 3756, The World Bank. [Downloadable!]
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